Correcting Sub-S Balance Sheet

[Burke]

I am trying help out a client who has always done their own QBks. Last year (2011), the corp took out a loan, deposited it into the checking account and used the money to do renovations to the bldg. The money was booked in the Long Term Liability Account when deposited, and the renovations were booked as Expenses on the P&L as they were done. (Of course, this is not how it was treated on the tax return.) The loan was refinanced and consolidated with another debt in another company in 2012. Now, to get rid of the LTL account, what is the offsetting journal entry? A credit to Retained Earnings? The LTL account was never adjusted when payments were made so it is still the original amt, as the total payment was also booked as an expense. I know how to adjust that. But I want to get rid of the remaining loan altogether.

[Roland Slugg]

The LTL account was never adjusted when payments were made so it is still the original amt, as the total payment was also booked as an expense.

Oh, my! Obviously, all THOSE payments need to be corrected ... charging the payments to P&I instead of to other expenses.

The refinanced loan should NOT be deleted by crediting Retained Earnings. According to your OP the loan still exists, but there is a new/different lender. Thus, the liability should remain on the books and a journal entry should be recorded to remove the old loan and set up the new one. If there was a principal pay down or an additional amount borrowed upon re-fi, that difference should have passed through the bank account.

[Burke]

Right. That would be the way to do it if it was all within in the same company. It's not. The refi-ed loan was made to another newly-formed LLC (same 100% owner) which now owns the bldg as rental property, and as a result it paid off the old loan(s)shown in the Sub-S (same bank). So it is not a new bank. New company. And therein lies my problem. I've got to get it out of the Sub-S. Frankly, it never should have been IN the Sub-S as the Sub-S never owned the bldg. It is just the way they booked it. The newly-formed LLC purchased another bldg and both loans were rolled into the same loan. All has been booked correctly now in the LLC. I am thinking the Sub-S's Retained Earnings account is all out of whack anyway since they showed the renovations as expenses.

[Uncle Sam]

Sub S Balance Sheet

Set up intercompany Receivable/Payable.

S Corp where it was booked in error -
Net out the liability balance and post the excess credit to a Receivable.

In the S Corp where it belongs-
DR Building
CR Accum Deprec
CR Payable - S Corp

Of course - you'll need to get the bank approval to switch corporation debt. Then, change the title to the
payable account to bank instead of the 1st S Corp.

[Burke]

Thanks. Very interesting. Will try that. As I mentioned earlier, loan was never in Sub-S name anyway. Neither was the bldg. Loan was made to owner. (I guess you could look it as a loan to the corp on his behalf?) They just stuck the money in that account and paid for the upgrades with the money out of that account. So all is right with the bank. And the tax return. The loan interest and depreciation were all taken properly on Sche E.

[Gretel]

Another thought. If there are loan proceeds left in the bank account from the original loan then either the inter-company account could be credited or the funds will be a distribution? Balance might be to high for this.

[Burke]

Nope. They spent every penny and a little beyond that.